Putting “Rules of Thumb” to Bed

Before we begin to install all the pieces in The Relaxing Retirement Formula™, I want to share a conversation I recently had that I believe will be very instructive, while also serving as a great starting point for our discussion.

This past Fall, I was referred to a very nice couple by one of our Relaxing Retirement members.

They were very well read and brought a lot of questions to the table which I really appreciate.

What led them to come in to see me was the fact that the husband was planning to retire after 37 years with his employer, and they now wanted to get a handle on “THE” right investment allocation in retirement.

They had done a lot of reading and the theory that made the most sense to them was the “100 minus your age” rule of thumb.

What this theory suggests is that the percentage of your overall allocation you should invest in equities (stock based investments) is 100 minus your age.

So, for example, if you’re 65 years old, you should allocate 35% to equity based investments. (100 – 65 (age) = 35%)

Based on that theory, everyone who is 65 years of age should invest 35% of their holdings in stock based investments.

It doesn’t matter what your circumstances, priorities, or tolerance for risk are.

This is what is known as a classic “rule of thumb”, and as you can probably imagine, I have significant challenges with it for you.

Rules of Thumb

For starters, why do “rules of thumb” exist?

They exist to provide a broad guideline to the biggest audience possible. They have nothing to do with you personally.

If the consequences of blindly following rules of thumb like this weren’t so costly and dangerous, I’d settle for just saying they’re silly.

However, the stakes are just too high.

The question to ask yourself is ‘am I willing to bet my financial future on a broad “rule of thumb” created for the masses’?

Before you answer, think about this. If you have a serious medical condition, potentially life or death, do you base your actions on what is presented as a good “rule of thumb” in medical publications?

Or, do you prefer to have a prescription designed for you personally after a series of tests and evaluations?

I would wager a lot of money that it’s the latter for you.

It’s Different in Retirement

As you’ve heard me say more than once, when you’ve reached the stage in life you’re experiencing right now (where you’re dependent on the money you’ve saved to support your lifestyle), your overall “strategy” has to drastically change because the stakes are so high now if you fail.

Although it would certainly be more convenient if there was ‘one’ answer to “THE” right allocation question in retirement, there simply is not.

Here’s why…

How Dependent Are You?

Let’s take a look at two couples, both age 65. Each couple has $1 million dollars in investments (a nice round number to work with), the same social security retirement income, and the same pensions.

John and Mary Independent have no mortgage or home equity line of credit, and have recently completed many of the major upgrades to their home, i.e. a new roof, vinyl siding, a new furnace, and new bathrooms. They have always lived a very modest lifestyle with little or no debt.

Ron and Rose Reactionary still have $260,000 outstanding on a second mortgage they took out to pay for their kids’ college tuitions and weddings, and a condo down in Florida they bought a few years back. They both drive high end cars. And, while their home is very nice, after 29 years, it’s starting to look “tired” and could use some upgrades.

What’s the Difference?

The difference in this example is what it costs each couple to support their lifestyle.

The income that will be required by Ron and Rose will be much greater than John and Mary. Consequently, Ron and Rose will need to withdraw a much bigger amount each year from their investments than John and Mary.

In short, even before looking at anything else, it’s clear that Ron and Rose Reactionary are much more dependent on their investments than John and Mary Independent.

Without knowing anything else, if the both couples have the same amount of money saved, but Ron and Rose need to withdraw much more each month than John and Mary, don’t Ron and Rose need to earn more?

Don’t they require a greater rate of return than John and Mary in order to have their funds remain intact?

Of course.

Following that same train of thought, if they require a greater rate of return, shouldn’t they allocate their investments where they have a better chance of achieving that higher rate of return?


If that’s true, then how can they use the “100 minus their age” rule of thumb as a guideline for investing?

The obvious answer is they can’t. It would be foolish.

This rule of thumb can’t possibly be appropriate for John and Mary AND Ron and Rose.

Their level of dependence on their investments is so drastically different for that to be possible.

What I’d like you to take away from this week’s Strategy is an understanding that while it might appear entertaining, and feel like you’re pushing the “Easy Button” when you read “rules of thumb” like this put out there for the masses, relying on them in your own situation can be dangerously simplistic.

It would be nice if “the” solution was that simple. It would make our work together that much more simple.

However, after 22 years of working hands-on helping our members seamlessly transition to retirement, I can tell you that it never is.

Next week, we’re going to begin building The Relaxing Retirement Formula™, i.e. “the missing structure” you need to develop unstoppable financial confidence during this critical stage in your life.

Committed To Your Relaxing Retirement,

Jack Phelps

The Retirement Coach

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